ABR

Arbor Realty Trust Inc. - 10-Q Summary (Period Ended Sept 30, 2009)

Business Context and Reporting Period

Arbor Realty Trust, Inc. is a Maryland corporation organized as a Real Estate Investment Trust (REIT) that invests in a diversified portfolio of multi-family and commercial real estate-related assets, primarily bridge loans, mezzanine loans, and preferred equity. The company is externally managed by Arbor Commercial Mortgage, LLC (ACM). This report covers the quarterly period ended September 30, 2009, and the nine months ended on that date.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 40% for the quarter and 41% for the nine months compared to the prior year periods. Interest income dropped significantly due to a decrease in the average yield on assets (from 7.82% to 5.36% for the quarter) and a reduction in the loan portfolio size.
• Significant Losses: The company recorded a net loss of $44.1 million for the quarter and $96.9 million for the nine months, compared to net income of $2.6 million and $27.0 million, respectively, in the prior year periods.
• Provision for Loan Losses: A substantial provision for loan losses of $51.0 million was recorded for the quarter and $141.5 million for the nine months, compared to $3.0 million and $8.0 million in the prior year periods. This reflects deteriorating credit quality and declining collateral values.
• Restructuring and Impairment: The company recorded a $33.1 million loss on restructured loans for the nine months and a $4.9 million impairment loss on real estate held-for-sale. Conversely, it recognized a $54.1 million gain on extinguishment of debt for the nine months due to repurchasing debt at discounts.
• Debt Reduction: Total liabilities decreased from $2.30 billion at year-end 2008 to $1.97 billion at September 30, 2009, driven by debt extinguishments and paydowns.

Guidance, Outlook, and Risks

• Management Commentary: Management notes that the prolonged economic downturn and liquidity crisis in credit markets have materially impacted the business. The company has shifted strategy toward capital preservation, aggressively managing assets through restructuring, and repurchasing debt at discounts.
• Debt Restructuring: In July 2009, the company restructured its term credit agreements and working capital facility with Wachovia Bank. This extended maturities to 2012 but increased interest rates (LIBOR + 350 bps for term loans) and imposed mandatory amortization. Dividends are now limited to 100% of taxable income and must be paid primarily in stock.
• Management Fee Amendment: In August 2009, the management agreement with ACM was amended. The base fee was changed from a percentage of equity to a cost-reimbursement model (estimated $8.0-$9.0 million for 2009). "Success-based" payments of $4.1 million were made in Q3 for debt restructurings.
• Risks: Key risks include continued declines in real estate values, increased loan defaults, inability to refinance debt on favorable terms, and the potential for further impairments. The company faces cross-default provisions where a default in one facility could trigger acceleration in others.
• Dividends: The Board elected not to pay a common stock dividend for the quarter ended September 30, 2009, due to the difficult economic environment.

Key Facts for Investor Verification

• Credit Quality Deterioration: Verify the extent of the $252.8 million allowance for loan losses and the specific loans contributing to the $51.0 million quarterly provision.
• Liquidity Position: Confirm the adequacy of the $27.3 million in unrestricted cash and $39.7 million in restricted cash against upcoming debt maturities and mandatory amortization requirements.
• Debt Covenant Compliance: Review the company's compliance with the new Wachovia covenants, specifically the minimum quarterly liquidity of $7.5 million and the tangible net worth ratio.
• Real Estate Held-for-Sale: Assess the valuation and exit strategy for the $41.4 million real estate asset reclassified as held-for-sale, which incurred a $4.9 million impairment.
• Management Fee Structure: Understand the long-term impact of the new cost-reimbursement management fee structure on future operating expenses and potential "success-based" fees.